Seeking Alpha

MyPlanIQ's  Instablog

MyPlanIQ
Send Message
MyPlanIQ.com is the only web application that offers advanced asset allocation strategies customized to a wide range of retirement and taxable investment plans such as 401(k), IRA and brokerage accounts. The unique key advantages of MyPlanIQ.com are 1. Superior investment strategies with high... More
My company:
LTI Systems, Inc.
My blog:
MyPlanIQ News and Articles
  • ETF Clone of Morninstar's Stellar 401K -- Step 1 Map ETF's and Measure Returns 0 comments
    Jan 31, 2011 10:48 PM | about stocks: SPY, VTI, EFA, VEU, EEM, VWO, IYR, VNQ, ICF, AGG, BND, DBC, HYG, JNK, PHB, AOM, AOK, CIU, BIV, ITM, AOR, AOA, MUB, TFI, PZA, MLN, EFG, GWL, IDHQ, IVE, IWW, JKF, VTV, PWV, RPV, SCHV, SCZ, EFV, PID, DWM, IFGL, RWX, IGOV, BWX, WIP, IVV, IYY, IWV, VV, DLN, RSP, SCHX, IOO, VT, SHY, SHV, VGSH, PLK, TLT, TLH, IEF, EDV, VGL
    In a previous article we reviewed Morningstar's 401K plan and said that it was a model plan that would be worth cloning with ETFs. Currently the Morningstar plan uses a range of funds that are managed and not ETFs.

    Over the next series of articles we are going to attempt to build an ETF clone and learn, step by step, where we can improve performance to end up with an elegant and high performance plan.

    The first step is to simply replicate each of the funds in each asset class with an ETF equivalent. We use the commission free ETFs selected by Morningstar for TD Ameritrade. Once we have done that, we will measure the performance of the portfolio against the original.

    Below is the fund list for each plan so that you can see how it was cloned. For those that are interested, it is possible to substitute other ETFs.

    Asset Class

    401K

    Clone

    COMMODITIES BROAD BASKET

    PCRIX

    DBC

    DIVERSIFIED EMERGING MKTS

    NEWFX

    EWX

    DIVERSIFIED EMERGING MKTS

    ODVYX

    VWO

    Financial

    FSLBX

    XVF

    Foreign Large Blend

    VWILX

    VEA

    Foreign Large Value

    TBGVX

    EFV

    High Yield Bond

    PHIYX

    JNK

    Inflation-Protected Bond

    PRRIX

    TIP

    Intermediate-Term Bond

    PTTRX

    AGG

    LARGE BLEND

    SLASX

    VTI

    LARGE BLEND

    VINIX

    IWV

    LARGE BLEND

    OAKMX

    VIG

    LARGE GROWTH

    HACAX

    MGK

    LARGE GROWTH

    CISIX

    VUG

    LARGE VALUE

    RWMFX

    VTV

    Mid-Cap Growth

    BRWIX

    IWP

    Mid-Cap Growth

    POAGX

    VOT

    MID-CAP VALUE

    VASVX

    VOE

    Moderate Allocation

    VGSTX

    AOM

    Multisector Bond

    LSBDX

    GVI

    REAL ESTATE

    REFDX

    VNQ

    Cash

    CASH

    CASH

    SHORT GOVERNMENT

    STABLEVALUE

    SHY

    Short-Term Bond

    VBISX

    BSV

    SMALL BLEND

    OTCFX

    VB

    SMALL VALUE

    PSVIX

    VBR


    We were able to map each class from the TDA plan with the exception of:

    Financial

    FSLBX

    XVF


    We used XVF which is the ETF we use to monitor the US Sectors.

    Asset Class

    401K

    Clone

    Balanced Fund 1 1
    REITs 1 1
    Fixed Income 6 6
    Commodity 1 1
    Sector Fund 1 1
    Foreign Equity 2 2
    Emerging Market Equity 2 2
    US Equity 11 11
    Other 1 1
    Total 26 26

    We remarked that this was an excellent selection in terms of quality and balance.

    We now compare the rankings.

    Rating Attribute

    401K

    Clone

    Diversification

    97%

    97%

    Fund Quality

    63%

    33%

    Portfolio Building

    95%

    49%

    Overall Rating

    86%

    58%

    We note that the diversification is the same but the fund quality of the managed funds are higher than the ETF index funds showing selections with good managers.

    As a result, the ability to combine the funds to create strong portfolios is also reduced and so there is a significant difference between the plan ratings.

    Once we have established a baseline, we will start working on improving the fund quality to see if we can get closer to the original.

    At the moment, we are expecting the performance of the clone not to meet the the original.

    Portfolio Performance

    Performance chart (as of Jan 28, 2011)

    Performance table (as of Jan 28, 2011)

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Morningstar 401K ETF Clone Tactical Asset Allocation Moderate 14% 96% 8% 62% 11% 71%
    Morningstar 401K ETF Clone Strategic Asset Allocation Moderate 16% 139% 3% 14% 5% 28%
    Morningstar Inc 401K Plan Tactical Asset Allocation Moderate 21% 157% 13% 122% 14% 122%
    Morningstar Inc 401K Plan Strategic Asset Allocation Moderate 14% 165% 3% 22% 5% 32%


    The returns are fair in an absolute sense even if we see this under-performing the original portfolio. We will expect to drive this up as we tune the fund selections.

    We anticipate that with better fund selection, we will be able to drive up returns between 1-2% and we will see whether this turns out to be true.

    When we use the TD Ameritrade plan with 101 commission free ETFs -- i.e. we give a wide choice for rotating funds, we are able to get much closer to the original plan.
     

    Performance chart (as of Jan 28, 2011)

    Performance table (as of Jan 28, 2011)


    We have established an initial version of the clone with returns that are within striking distance of the original. We have shown that with a large selection of funds, we can meet the original in returns if not in elegance.

    The next step is to start drilling down on individual ETF choices to see if we can drive the performance up.

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies that provide the funds mentioned in this article. MyPlanIQ does not set up investment plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.



    Disclosure: I am long DBC, DJP, IWO, IJR.
Back To MyPlanIQ's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.